Discounted Cash FlowThe Discounted Cash Flow ratio (DCF) uses a company’s estimated future profits to decide if the stock is a good buy or not. It can help determine if a company is growing.The Formula for the discounted cash flow looks like this DCF= (CF)1/(1-r)1 + (CF)2/(1-r)2+…..+(CF)n/(1-r)n WhereCF= Cash Flow r= Discounted rate (WACC) The formula may look complex but is actually based on a very simple theory. Money depreciates over time, therefore in order to determine if a stock is a growing or not you must take the estimated future profits and find out how much that money would be worth in today’s value. That is really all it does. If that value is higher than the company’s present cash flow it could mean the company is growing and would be a good investment.
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